As China’s Economic growth slows down in the heat of its trade war with the United States, developing countries like Nigeria, who rely on Chinese loan may become adversely affected.
The first and second economies in the world have drawn daggers, and while they have not gone for each other’s throat, they are definitely attacking each other’s belly.
The United States had long protested that China unfairly devalues its currency, the Yuan, so that Chinese goods are relatively cheap compared to American products. China responded by reminding the Americans that they had put themselves in unfair advantage by determining the rules of international trade in the first place.
However, the conflict intensified when US president, Donald Trump, a Nationalist whose moto is ‘America First’, imposed heavy tariffs on Chinese imports into the US and the Chinese retaliated in kind. These tariffs, coupled by other factors, have slowed down the Chinese economy, which was growing at double digits 1o years ago. In the latest round of talks, both parties have agreed to suspend the punitive tariffs and wait for a 90-day window to resolve the crisis.
According to analysts, China’s economic growth rate went down to 6.5 percent in the third quarter of last year; the lowest ever since 2009. Economist forecast for this year is even more gloomy; at 6.2percent.
All the signs on ground shows that things are not looking good in China as they did two years ago. Car purchases fell last year for the first time in more than two decades. iPhone sales also went down abnormally in China last year. Meanwhile, the stock market in Shanghai has still plunged by more than a quarter from its 2018 high.
China has been shuffling its securities regulators in the past three years, indicating that all is not well in one of the fastest growing economies in the world. Banking veteran Yi Huiman was appointed the new chairman of the China Securities Regulatory Commission on Saturday, January 26.
Bloomberg reported on January 27 that Chinese banks are desperate for capital.
“To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41 percent, deposits rose just 29 percent. That put balance sheets under increasing strain,” according to Bloomberg
Chinese banks have lent out too much money than they should have. Although not yet insolvent, they do not have enough money to fulfil their lending obligations unless they get some money from outside. Chinese Banks simply don’t have the ability to continue lending as much as they do without additional capital.
This means China cannot loan out money to other countries as it used to. This is a source of worry for third world countries, like Nigeria, which is leveraging Chinese funding to execute $3.4 billion worth of projects. In September 2018, President Muhammadu Buhari was in China to secure an additional $328 million from the Asian economic powerhouse.
Nigeria’s increasing dependence on Chinese loans
Under President Muhammadu Buhari, Nigeria in increasingly dependent on loans to fund infrastructure projects and a large percentage of this is coming from China. Most of Nigeria’s borrowing from China is coming from the Chinese Export-Import Bank (Exim)
In August 2016, the Federal Government announced that it was seeking a loan of $20 billion from the China Exim bank to finance infrastructural projects at a time when foreign debt stood at $11.26 billion. One of the downsides of this is that the Chinese government gave stringent conditions to Nigeria for the loan, including the appointment of Chinese officials to oversee the utilization of the fund.
A breakdown of projects financed by Chinese loans:
Mambila hydro-electric power plant – $4.8 billion; railway modernisation coastal project (Calabar-Port Harcourt-Onne Deep Seaport segment) – $3.5 billion; Abuja mass rail transit project – $1.6 billion; Lagos-Kano railway modernisation project (Lagos-Ibadan segment double track) – $1.3 billion; Lagos-Kano railway modernisation project (Kano-Kaduna segment double track) – $1.1 billion; and others – $6 billion.
In February 2016, Minister of Transportation, Rotimi Amaechi announced that the government has secured a $7.5 billion loan from China for the construction of standard rail gauge from Lagos to Kano. Again in August 2018, during the FOCAC Round Table meeting in Beijing, Buhari announced that Nigeria has signed an additional $1billion loan from China for additional rolling stock for the newly constructed rail lines as well as road rehabilitation and water supply projects.
Today, Nigeria’s foreign debt has increased to $22 billion and China accounts for the bulk of that debt.
Buhari has argued that the money borrowed from the Chinese has been efficiently utilized, citing ongoing projects under his administration that are being financed by loans from China.
In September 2018, the Federal Government in response to concerns about its growing Chinese debt, said through the Debt Management Office, that it borrows from China in order to take advantage of a cheaper source of finance. The DMO also reveals that the loans come with concessions which them very attractive.
“Given the country’s infrastructure deficit, which needs to be urgently addressed, the loans from China Exim, which provide financing for critical infrastructure in road and rail transport, aviation, water, agriculture and power at concessional terms, are appropriate for Nigeria’s financing needs and align properly with the country’s Debt Management Strategy.” The DMO said.
Dangers on the horizon
In October 2018, the MarketWatch warned about the time bomb of Chinese overfunding to Developing economies. It also warned that the terms of these loans may not be transparent enough and that it is probably only the officials involved directly in negotiating these deals that actually know and understand the terms of obligation for both borrower and lender.
“China is not a member of the Paris Club, so there is no reason to assume that the usual approach to official debt negotiations is relevant to understanding what may happen. If, as I suspect, widespread debt-servicing difficulties are on the rise among many of the world’s poorest countries, China’s tendency to favor collateralized loans raises particular challenges,” The Marketwatch said.
As the Chinese economy slows down and Chinese banks gasp for need of cash, it is highly unlikely that China will be interested in any new request for funds from Nigeria. It is also expected that the Chinese will now be more eager to recover their loans back which means stricter economic policies on Nigeria. This is worrisome for Nigeria as the country does not seem to have diversified its debt portfolio properly in the past three years, but instead focussed more on Chinese funding.
In short, the Nigerian government has become addicted to Chinese money. When the money stops coming, or reduces significantly, which may happen soon, is the government poised to adapt to the new changes?
Most of the projects funded by Chinese loans are not completed. The Lagos-Ibadan rail line was due to be commissioned last year December, but completion has been postponed to February 2019.
Moreover, these projects are being executed by Chinese companies, which is one of the conditions for the loans. The Lagos-Ibadan rail line for instance is being handled by the Chinese Civil Engineering Construction Company (CCECC). This is a smart move by the Chinese to ensure double capital flight back to China inform of business revenue and loan repayment. Now, with the pressure on Chinese banks for capital, these companies may also be under pressure to ramp up tax remittances back home.
Is the government seeking alternative funding for the projects? What will be the fate of these projects and other infrastructure commitments when funding stops?
As Nigeria heads into the presidential election in February, it is doubtful if any of the top contenders understands the enormity of the challenges awaits him when he resumes in May